M&M Proposition 2 with taxes: You own all of the equity in a debt-free app development business that generates cash flows of $400,000 each year in perpetuity. The cost of assets, kAssets, is 10 percent, and the tax rate is 25 percent. What is the value of your all-equity firm? If you decide to replace $1 million of equity by borrowing

$1 million at an interest rate of 6 percent, how much will the value of the firm increase? What would the kcs and WACC for your business be before and after the proposed financial restructuring? Use M&M Proposition 2 with taxes, Equation 16.5, to determine the expected return on the equity for input to the WACC calculation. Assume that all cash flows are perpetuities and that the second and third M&M conditions hold.